Consumer Compliance Outlook: First Issue 2018

Responding to Counterfeit Instrument Scams

Editor’s Note: This article was originally published in 2008. We have updated it to reflect changes that have occurred since then.

It has become an all-too-familiar situation for many financial institutions: A customer makes a transaction with a third party over the Internet (e.g., selling an item on an online marketplace) and is paid with a counterfeit cashier’s check, money order, or similar instrument. The customer deposits it into his bank account, and the institution provisionally makes the funds available by the next business day, as required by the Expedited Funds Availability Act (EFAA) and Regulation CC, its implementing regulation. When the customer checks his balance and learns that his available balance includes the deposit, he completes the transaction with the third party by sending a wire payment to the buyer based on a contrived explanation:

I’m enclosing payment for the car you listed on eBay. The check is greater than your asking price because I hired a shipping agent to deliver it. The check includes the shipper’s fee and an extra $100 for your trouble. Please wire the overpayment, less your $100, to the shipper.

The payor bank to which the check will be presented for payment will flag it as a counterfeit and return it to the depositary bank, a process that can take several weeks.1 When the check is returned unpaid, the depositary bank will deduct the amount of the check from the customer’s account or demand repayment if the account has insufficient funds. The customer had assumed the check was paid because the funds were labeled as available and blames the bank for this misunderstanding; however, the bank has simply complied with federal law by providing a provisional credit within the EFAA/Regulation CC timeframe.

The Federal Trade Commission (FTC) tracks incidents of counterfeit checks and other scams through a periodic survey. In the 2011 survey (the most recent), the total number of counterfeit check incidents was estimated to be between 100,000 and 1.1 million.2 The Better Business Bureau also reports that counterfeit check scams ranked second on its list of the Top 5 Most Risky Scams for 2016.3 These data points suggest that counterfeit cashier’s checks and similar instruments continue to present challenges for consumers and financial institutions. This article provides an overview of this issue and sound practices for financial institutions to help mitigate the risks.

Background

Congress passed the EFAA in 1987 to “end excessive holds on customer deposits by depository institutions”4 by establishing the maximum permissible hold periods for checks and other types of deposits. For certain “safe” instruments considered low risk for being dishonored, the law requires next business day availability. This includes cashier’s and certified checks, Treasury checks, U.S. postal money orders, checks drawn on a Federal Reserve Bank or Federal Home Loan Bank, and checks issued by a state or local government.5

Although the law ended unreasonable hold periods, criminals have developed fraudulent schemes that exploit the delay between the time federal law requires funds to be made available from a deposit and the time a counterfeit instrument is returned by the institution on which the check is purportedly drawn.

When the EFAA was enacted, desktop publishing was in its infancy, and tools to create high-quality counterfeit checks were expensive and not readily available. Consequently, Congress did not consider the risk of counterfeit instruments when it mandated next-day availability for certain instruments.6

Desktop publishing has evolved considerably since 1987. Inexpensive, off-the-shelf software and hardware can now create counterfeit instruments, such as cashier’s checks or money orders, that look identical to the actual ones.7 Criminals understand that many people mistakenly believe that these checks or money orders cannot be rejected, so they exploit the delay between the time deposits must be made available provisionally under the EFAA and the time it takes to discover an instrument is counterfeit. During this window of opportunity, fraudsters deceive victims into wiring excess funds from the check or money order that was deposited.

Nature of the Schemes

Although too many schemes exist to provide an exhaustive list, some of the common ones many institutions encounter include:

Online transactions: As discussed previously, a consumer sells an item through an online marketplace such as eBay or Craigslist, and someone offers to buy it using a cashier’s check (or similar instrument) for an amount greater than the asking price. The buyer offers a contrived explanation for the overpayment and asks the seller to deposit the check, keep the amount of the selling price plus $100 extra for his time, and wire the balance back to the buyer after the check clears.

Mystery shopper: The consumer receives a letter stating she has been chosen to act as a mystery shopper and receives a cashier’s check to deposit. The consumer is told to use a portion of the funds to purchase merchandise at the designated stores, transfer a portion of the funds to a third party using a designated wire service company, and keep the remainder.8

Lottery or inheritance: The consumer is notified that he won a lottery (even though the consumer may not have actually purchased a ticket) or inherited money, and he receives a check, with a request to wire back a portion of the check to cover taxes.

While these schemes initially focused on consumers, businesses — particularly law firms — also have been targeted in recent years. In a common scheme, the fraudsters contact law firms pretending to be new clients seeking representation to collect debts. For example, in Greenberg, Trager & Herbst, LLP v. HSBC Bank USA,9 a North Carolina law firm received an email from a company in Hong Kong that sought to retain the law firm to collect debts from its customers in North America. When the law firm asked for a retainer, the potential client said that one of its customers sent a payment to the law firm, from which the retainer could be deducted. The firm received a Citibank check for $197,750, which the law firm deposited into its attorney trust account with HSBC. Processing of the check was delayed because it had an incorrect routing number, which criminals sometimes deliberately do to slow the discovery of the fraud.10

The law firm alleged that an HSBC representative confirmed by phone that the check had “cleared” and that the funds were available in the account. Based on this information, the firm wired $187,750 to the new client in Hong Kong. Citibank later notified HSBC that the check was a counterfeit, and HSBC revoked the provisional credit for the deposit and deducted the amount from the firm’s bank account. The law firm sued Citibank and HSBC, but the lawsuit was dismissed. On appeal, the New York Court of Appeals affirmed the dismissal, noting that Citibank, as the payor bank, returned the item within the timeframe of the Uniform Commission Code’s midnight deadline rule and that was the extent of its legal obligation to the law firm.11

Many similar cases involving law firms have emerged in recent years involving counterfeit checks for hundreds of thousands of dollars.12 Thus, counterfeit check schemes continue to present risks to consumers, businesses, and financial institutions.

Risk Mitigation

Educating Customers

Counterfeit instrument scams present challenges for financial institutions because many consumers and businesses believe that certain instruments, such as a cashiers’ check or a money order, cannot be dishonored. They therefore assume that provisional next-day funds availability means their financial institution was paid on the deposited instrument.

Financial institutions can play an important role by educating their customers about this issue. This is admittedly a delicate task because banks want to educate their customers without alarming them.

When a check or similar instrument subject to next-day availability of funds is deposited, a financial institution will typically provide a receipt indicating the date on which the funds will be available. This receipt provides an opportunity to communicate to customers that, although funds may be made available provisionally the next business day because of federal law, this availability does not mean the item has been paid by the issuing bank and customers should exercise caution when dealing with third parties with whom they have no prior relationship or experience.

For deposits made in person, banks could consider training tellers to discuss the risks of accepting cashier’s checks from third parties with whom they have little or no prior dealings.

The brochure provides helpful information that banks can share with their customers to help educate them, including the following tips:

Avoid offers that require paying for a free prize or a gift.

Know who you are dealing with and never wire money to strangers.

When selling something, never accept payment for more than the selling price, no matter how tempting the offer or how convincing the story. Suggest an alternative way for the buyer to pay, such as an escrow service or online payment service.

When accepting payment by check, ask that the check be drawn on a local bank or a bank with a local branch to verify the check is valid.

If a buyer insists that you wire back funds, end the transaction. Legitimate buyers don’t pressure you to send money by wire transfer services. In addition, you have little recourse if there’s a problem with a wire transaction.

Resist any pressure to “act now.”

Other helpful tips for consumers include:

Understand the difference between having access to funds from a deposit because federal law requires it and the actual time it can take for banks to clear checks.

Examine cashier’s checks or money orders carefully for any irregularities.

Contact the banks issuing cashier’s checks and money orders to verify if the instruments were issued in the amount stated and if they had been paid to the depositary bank. Customers should obtain the bank’s phone number from an independent source, since the counterfeit check could display a fake phone number of a person working in tandem with the fraudster.

Be aware that wire transfers generally cannot be canceled once the transfer has been completed.

Remember the adage: If it sounds too good to be true, it probably is.

Banks can also consider posting advisories on their websites, in their mobile applications, and in branches about counterfeit check scams to alert customers to the red flags of suspicious transactions.14

Educating Employees

A well-trained staff can also help detect counterfeit or altered checks. Some physical counterfeit signs that employees can be vigilant for include signs of alteration or erasing, spelling errors, mistakes, suspicious check amounts, a lack of or incorrect financial institution information, a routing number that does not match the routing number of the instrument’s issuer, and an incorrect sequence number.

A bank could also mitigate risks by including its wire department in any educational campaign because many schemes require the consumer or business to wire funds to a fraudster. Banks may consider training wire department staff to recognize suspicious transactions in which bank customers are at high risk for counterfeit check scams. Typically, these scams involve some or all of the following characteristics:

A wire-transfer request made shortly after a check has been deposited is subject to next-day availability that a customer received from a third party with whom the customer has no prior dealings.

The instrument deposited is generally believed by consumers to be incapable of bouncing such as a cashier’s check or certified check.

A customer who rarely makes wire transfers makes a transfer.

A recipient is outside the United States.

When a wire transfer is requested with some or all of these characteristics, staff may consider informing the customer about counterfeit check scams and the risk of wiring funds to someone with whom the customer has no prior relationship.

Verifying Suspected Counterfeit Instruments

Financial institutions can also check online databases to verify if a Treasury check, postal money order, or Walmart money order was validly issued.

Treasury checks

The Treasury department has an online application to authenticate Treasury checks; banks can enter the amount of a Treasury check and its number to verify it was issued.15

The site also provides a guide to the security features of Treasury checks that can be used to detect counterfeits.

Postal money orders

The U.S. Postal Service provides a phone number to verify postal money orders: 866-459-7822. The postal service also has a web page discussing security features.16

Walmart money orders

Walmart money orders can be verified by calling 800-542-3590.

Conclusion

When the EFAA was enacted, counterfeit checks and other instruments did not present a significant risk, and Congress required short hold periods for instruments with low rates of return. However, advances in technology have enabled individuals to create sophisticated counterfeit instruments inexpensively. The short hold periods under the EFAA for certain instruments presents a challenge for consumers, businesses, and financial institutions. Educating customers and training employees can help mitigate the financial impact of these scams. Specific issues or questions should be discussed with your primary regulator.

6 Congress heard testimony on the emergence of this problem in a 1997 hearing, “Computer Generated Check Fraud.” Hearing before the Subcommittee on Domestic and International Monetary Policy, the Committee on Banking and Financial Services, and the House of Representatives, May 1, 1997. “The technological improvements that have fueled the growth in check fraud schemes have made it difficult for law enforcement to combat the problem, Forbes magazine reported on the trend in 1989, stating ‘the desktop computer did not create the crime of forgery. All it did was make the tools user-friendly. With the prevalence of laser printers and advanced duplication systems, the production of quality counterfeit checks has improved substantially.’“ (Statement of Charles L. Owens), https://archives-financialservices.house.gov/banking/5197chow.shtml. See also “New Breed of Check Forgers Exploits Desktop Publishing,” Saul Hansell, New York Times(August 15, 1994). “The proliferation of desktop publishing has brought a new growth industry, the counterfeiting of virtually undetectable fraudulent checks, and banks and law enforcement officials say the cost to the economy could reach $1 billion this year.” https://www.nytimes.com/1994/08/15/us/new-breed-of-check-forgers-exploits-desktop-publishing.html.

Contact Us

Copyright Federal Reserve System. This material is the intellectual property of the Federal Reserve System and cannot be copied without permission.
Links with the orange box icon () go to pages outside of the website.